Gold consolidates below recent highs as USD strength and Fed hike bets cap ahead of US NFP

Gold (XAU/USD) found itself stuck below $4,250 during Friday's Asian session, seemingly unable to capitalize on the previous day's decline from its highest level since June 18. Market participants appear hesitant to take significant directional positions, opting instead to await the release of the highly anticipated US Nonfarm Payrolls (NFP) report amidst ongoing geopolitical tensions.

Saudi Arabia revealed an intelligence report suggesting Iraqi militias are colluding with Houthis in Yemen to launch an attack against the kingdom. Meanwhile, Iranian state news disclosed a framework agreement aimed at managing the Strait of Hormuz, which would restrict passage for US, Israeli, and hostile vessels until compensation is paid.

This news dampens hopes for a diplomatic resolution to the five-month-long US-Iran conflict, further bolstering the safe-haven status of the US Dollar (USD) and potentially hindering gold's upward momentum. The US-Iran standoff, combined with missile strikes on Saudi oil tankers by Iranian-backed Houthis, adds to concerns about possible energy supply disruptions, helping crude oil prices maintain their strong gains from Thursday.

Investors remain cautious that higher oil prices could reignite inflationary pressures, prompting major central banks, including the US Federal Reserve (Fed), to adopt a more aggressive stance. According to the CME Group's FedWatch Tool, traders still believe there is an 80% chance the Fed will increase interest rates by the close of this year, which benefits the USD bulls and underscores the importance of waiting for US jobs data before positioning for the resumption of gold's recent surge past the $4,000 psychological barrier.

Analysts at OCBC suggest that "near-term momentum has improved," with the upcoming US payrolls report expected to provide crucial insight into the Fed's policy trajectory and potential fresh momentum. Gold's recent price action, currently trading around 4,247 levels, has demonstrated mild bullishness, with the Relative Strength Index (RSI) nearing overbought conditions.

On the technical side, support can be found at 4,160 (50-day moving average) and 4,077 (21-day moving average), while resistance levels are positioned at 4,333 (23.6% Fibonacci retracement of 2,026 high to low), 4,393 (100-day moving average). Central banks, the largest holders of gold, continue to accumulate the precious metal as a store of value, hedge against inflation, and diversify their reserves to strengthen their economies and currencies.

In 2022, central banks added 1,136 tonnes of gold, worth around $70 billion, marking the highest annual purchases since records began. Gold has an inverse relationship with the US Dollar and US Treasuries, both of which serve as major reserve and safe-haven assets. When the dollar depreciates, gold typically appreciates, enabling investors and central banks to diversify their holdings in turbulent times.

Gold also exhibits an inverse correlation with risk assets, meaning that a stock market rally usually weakens gold prices, whereas sell-offs in riskier markets can favor the precious metal. Various factors, such as geopolitical instability or fears of a deep recession, can lead to a surge in gold prices due to its safe-haven status.

As a yield-free asset, gold tends to rise when interest rates are low and suffers when rates are high. However, most movements are influenced by the US Dollar (USD), as gold is priced in dollars (XAU/USD). A strong USD tends to control gold prices, while a weakened USD could push gold prices upward.